Regulation Update

Check out The Detailed Provisions on Fiscal Depreciation in PMK 72/2023

Technical provisions related to the depreciation of tangible assets and amortization of intangible assets, on the acquisition of a fixed asset for fiscal purposes, have been released through Minister of Finance Regulation (PMK) Number 72 Year 2023.

The regulation is a derivative of Government Regulation (PP) Number 55 of 2022 and Law (UU) Number 7 of 2021 on the harmonization of Tax Regulations (HPP).

There are several provisions regulated in more detail in PMK 72 of 2023, compared to the two regulations mentioned. Some of the technical matters regulated include:

1. List of asset groups, useful life, and calculation of depreciation/amortization
2. Determination of the start of depreciation/amortization
3. Provisions regarding depreciation of permanent buildings
4. Procedure for submitting notifications
5. Provisions for depreciation of expenses for improvements to tangible assets
6. Provisions regarding the imposition of losses and income bookkeeping due to insurance reimbursement
7. Provisions for expenses for obtaining software, and
8. Depreciation/Amortization of assets owned and used in certain business sectors

Method and Useful Life

Depreciation is the process of allocating costs for the acquisition of tangible assets or internal assets used to obtain, collect, and maintain income or what is often referred to as 3M.

In the previous provision, namely Government Regulation Number 55 of 2022, in calculating asset depreciation, two methods must be used. They are the straight-line or declining balance method. As for the useful life, it is adjusted to the type of asset.

There are four groups for tangible non-building assets and two groups for building assets with different useful lives.

While the determination of useful life and amortization rates for intangible assets are determined as follows:

A more complete description of the types of assets included in each asset group can be seen in the attachment to PMK Number 72 of 2023.

Building Useful Life Flexibility

For fixed assets in the form of permanent buildings and intangible assets that have a useful life of more than 20 years, the useful life on which depreciation/amortization is calculated can be determined flexibly. It means that it can have a useful life of 20 years or according to the useful life stated in the taxpayer's books.

To be able to do depreciation and amortization according to the actual useful life, taxpayers simply submit a notification to the Director General of Taxes.

Previously, the flexibility of calculating depreciation of permanent building assets had been mentioned in PP 55 of 2022 and is now reaffirmed in PMK 72 of 2023.

It should be noted, in addition to emphasizing, this new regulation also turns out to provide relaxation for taxpayers who have not submitted a notification regarding the use of the actual useful life until the end of the 2022 tax year.

With this relaxation, taxpayers can submit a notification of actual useful life usage until 30 April 2024.

Determination at The Start of Depreciation

In general, depreciation begins when a taxpayer makes an expenditure to acquire a tangible asset, except for tangible assets that are still in the process of being worked, have never been used or produced, and that is owned and used in certain business fields.

For tangible assets that are still in the process of being worked on, depreciation begins in the month after the work on the property.

Then for assets that have not been used or generated, depreciation can begin during production. However, taxpayers must first submit an application to the Director General of Taxes. Furthermore, the Director General of Taxes will determine when depreciation starts.

Depreciation of Repaired Assets

In addition to the assets acquired, depreciation must also be recalculated on assets that are repaired. This is done by adding the repair costs incurred to the remaining fiscal book value of tangible assets.

For the repair mentioned, if it increases the useful life, it is calculated according to the remaining fiscal useful life. Meanwhile, if it becomes longer, the additional useful life must be accumulated with the rest of the previous useful life, maximum according to the useful life of the asset. Except for permanent buildings, actual useful life can be used.

Depreciation Related to Insurance Claims

Meanwhile, if there is a transfer of assets related to insurance claims, the depreciation must pay attention to the imposition of losses on the amount of the remaining fiscal book value of the transferred or withdrawn assets and the revenue recognition on the amount of the selling price or replacement value received from the insurance company.

The fiscal residual book value is the residual book value of tangible assets at the end of the month in which the event that is the basis of the insurance claim occurs.

In the event that the insurance reimbursement value received is known with certainty at a later date, the taxpayer must submit an application to the Director General of Taxes regarding the fiscal residual book value charged.

However, if the taxpayer has transferred or sold the insured asset before the reimbursement claim is received, the amount of the fiscal residual book value of the asset must first be calculated with the selling price to calculate the loss expense and revenue recognition.

Amortization of Software Purchase

For taxpayers who purchase intangible assets in the form of software or software for company operations with a useful value of more than one year, the amortization calculation uses a four-year useful value.

However, this provision only applies to software purchases in the banking, capital market, hospitality, hospital, or aviation sectors.

Likewise, when taxpayers increase the capacity or upgrade the software owned. The costs incurred can be added to the fiscal residual book value of the software.

Then, the sum is amortized using group one calculation, which uses a useful life of four years and an amortization rate of 25% (straight line) or 50% (declining balance).

However, if the purchased software is included in the purchase price of hardware, the expenses related to the acquisition of the software are carried out at once in the relevant year by calculating the depreciation of hardware classified as non-building fixed assets.

Depreciation and Amortization in Certain Business Sectors

In this regulation, the government also regulates depreciation and amortization in certain business sectors, which include forestry, plantation, and animal husbandry.

Then, the perennial plantation business sector includes the plantation business sector where plants can be produced many times and only produce fruit after being planted for more than one year.

Meanwhile, the livestock business sector includes businesses where livestock can be produced many times and only produce results after being raised for more than one year or within a period of one year.

Depreciation of tangible assets for plants or animals that have just produced fruit after being planted or maintained for more than one year, depreciation is carried out in equal shares (straight-line method) over their useful life.

For tangible assets whose actual useful life is other than those listed in the table, the actual useful life may be used after obtaining approval from the Director General of Taxes.

Then, for forestry, plantation, and animal husbandry businesses whose production occurs in a span of up to one year, such as laying hens or ducks, the acquisition cost can use a useful life of one to four years, with equal shares or the straight-line method.

For information, with the issuance of PMK Number 72 of 2023, the previous provisions related to depreciation and amortization are revoked, such as PMK Number 248/PMK.03/2008 concerning Amortization of Expenditures to Acquire Intangible Assets and Other Expenditures for Certain Business Fields.

In addition, it also revokes PMK Number 249/PMK.03/2008 on Depreciation of Expenditures to Acquire Intangible Assets Owned and Used in Certain Business Sectors, PMK Number 126/PMK.011/2012 on Amendments to PMK Number 249/PMK.03/2008 and PMK Number 96/PMK.03/2009 on Types of Assets Included in the Non-Building Tangible Assets Group for Depreciation Purposes. (ASP/KEN)